President’s Fiscal Year 2024 Proposed Budget: Breakdown & Analysis

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.

HOST: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today we're going to be talking about the tax provisions and the proposed budget released by President Biden earlier this month and the related Green Book subsequently released by the Treasury.

HOST: These are always interesting exercises, but it's even more interesting when we have a divided Congress. With the House and Senate controlled by opposite parties, it's highly unlikely that this budget proposal will pass, certainly not pass carte blanche in its present form. It is important to recognize, however, that what the president and his party are thinking about—tax revenue raisers—can keep showing back up and will have a place to play at some point.

HOST: Join in today's conversation: Ron Wingright, partner with our Tax Credits and Incentives team, and Brian Dill, leader of our International Tax Services team. Ron, how's it going today?

RON WINGRIGHT: Going great, Brooks. The sun is out in Raleigh, North Carolina, and we are going to be talking about the president's proposed budget.

HOST: Brian, how's life treating you?

BRIAN DILL: Fantastic, Brooks. Ready to talk about international.

HOST: Brian and I are both in our Atlanta, Georgia, office today, and joining us as always is Sarah McGregor from Greenville. Sarah, how's life treating you?

SARAH MCGREGOR: Life is good in Greenville, except my NCAA men's bracket is completely busted, so I've turned my complete attention over to the South Carolina Gamecocks winning the women's tournament. It's been a weird basketball season and the tournament has reflected that chaos.

HOST: All right, on with the exciting tax proposals. As a recap, every year the president presents a budget to Congress. Most of the time it has a lot of spending provisions to achieve the administration's goals, but there's always a revenue side that is typically the tax piece. Congress receives the budget and then proposes its own budget bill, normally starting with the House, and they frequently ignore whatever the president says. I don't know if they truly ignore it, but most of these proposals are concepts we've seen before from prior Build Back Better proposals, some from the Inflation Reduction Act, and a couple of new concepts. They mainly feel like modifications or additions to what we've already seen.

HOST: After President Biden and the White House released their budget, the Treasury issued a Green Book that has further explanation and scoring. There's way too much in here to cover every provision, so we'll concentrate on what we can, mainly focusing on business taxpayers. Many businesses are pass-through entities, so the ramifications on the individual side can't be ignored.

HOST: First things first: what's the possibility of this budget passing into law, Ron?

RON WINGRIGHT: Brooks, you summed it up well. Most presidents' budgets are negotiated heavily if they are ever passed. The president's budget for fiscal year 2024 outlines several major tax increases that would bring U.S. tax rates far out of step with international norms. Some proposals will be familiar to listeners because they're recycled from prior budgets and failed legislative attempts, but some are new.

RON WINGRIGHT: In total, the president's budget would add up to almost $4.7 trillion in new taxes, specifically targeted at businesses and high-income individuals. The proposal would put combined marginal tax rates significantly ahead of OECD averages. For example, the top combined marginal rate on individual income would move from 42.8% under current law to 45.4% under the proposal; the OECD average, excluding the United States, is 42.6%.

RON WINGRIGHT: On corporate income, where we're currently at a combined rate of about 25.7% following the Tax Cuts and Jobs Act of 2017, the budget moves that rate to 32.2%. The OECD average excluding the United States is 22.8%, so this would put the U.S. well above those averages.

RON WINGRIGHT: There have been comments that this is political posturing. The president indicated his budget would decrease our debt ceiling by about $3 trillion, so some have called this a "debt on arrival" budget.

HOST: Ron, you started talking about rates. Let's dig into that a bit. What are the proposals for increasing corporate and individual tax rates?

RON WINGRIGHT: The budget raises taxes by roughly $4.7 trillion, targeted at businesses and high-income individuals. On the corporate side, it increases the corporate income tax rate from 21% to 28%, which represents about a $1.3 trillion increase in projected revenue.

RON WINGRIGHT: It also quadruples the stock buyback tax, which was implemented in the Inflation Reduction Act at 1%, raising it to 4%.

RON WINGRIGHT: On the individual side, and for some pass-through businesses, it raises the top statutory tax rate on individual income to 39.6% for single filers earning over $400,000 and joint filers earning over $450,000, up from 37% under current law.

RON WINGRIGHT: The proposal expands the base of the Net Investment Income Tax (NIIT) to apply to active pass-through business income above $400,000 and increases the NIIT from 3.8% to 5% above $400,000.

RON WINGRIGHT: Other items include carried interest proposals to tax certain carried interest as ordinary income and real estate provisions we'll discuss shortly. The budget also taxes capital gains at ordinary income tax rates for taxpayers with income over $1 million and restricts contributions to individual retirement accounts for taxpayers with income above $400,000.

RON WINGRIGHT: The budget proposes significant increases in IRS funding—about a 15% increase, or roughly $1.8 billion, resulting in total IRS funding of about $4.1 billion for fiscal year 2024 in this budget. There's a lot to unpack, and most commentators view the president's budget as positioning ahead of negotiations.

HOST: On the international side, President Biden continues to recognize pressure around global minimum tax regimes. Brian, what are you taking away from these recommendations?

BRIAN DILL: Brooks, I echo Ron. President Biden has largely dusted off prior policies. The proposals are worker-friendly in intent, but they will restrict the ability of U.S. companies to earn and retain income offshore. They will subject those earnings to higher U.S. tax under the GILTI regime.

BRIAN DILL: Under the proposed changes to GILTI, taxpayers would no longer be eligible for the 10.5% rate deduction or the high-tax exception. The proposal essentially sets a U.S. rate at 21%, and if you paid taxes overseas in excess of that, you would be allowed a foreign tax credit—but only on a jurisdiction-by-jurisdiction basis. That limits the ability to aggregate foreign taxes and is both an administrative burden and a complexity. Overall, the proposals increase U.S. tax on international operations.

HOST: Are these proposals drawing us closer to OECD approaches or making us an outlier?

BRIAN DILL: They aim to be in line with certain OECD objectives, such as limiting export subsidies (FDII) and pursuing Pillar Two concepts, but they go beyond Pillar Two. From a rate perspective, U.S. taxpayers would be well in excess of the OECD's 15% minimum. The proposal includes an Undertaxed Profits Rule (UTPR) that functions like an alternative minimum tax to ensure sufficient tax is paid in the U.S.

BRIAN DILL: It's important to note that many of these rules, like BEAT and similar measures, apply to taxpayers with global receipts in excess of $750 million. Small and mid-market businesses generally will not be affected.

HOST: Ron, you mentioned real estate provisions earlier. What are the key proposals there?

RON WINGRIGHT: The budget proposes repealing Section 1031 like-kind exchanges for deferred gains above $500,000 for single taxpayers and above $1 million for joint taxpayers. It also proposes a 25% "billionaire minimum tax" to tax unrealized capital gains of high-net-worth taxpayers.

RON WINGRIGHT: Under the president's budget, the ultimate top combined marginal rate on capital gains moves from current law at about 29.1% to 49.8%. Compare that to the OECD average of 18.9%.

RON WINGRIGHT: The combined integrated rate on corporate income, considering all provisions, would rise from about 47.3% under current law to approximately 66% under the proposal. The OECD average is about 41.4%, which highlights the competitive disadvantage these proposals could create.

RON WINGRIGHT: The budget includes cryptocurrency tax rule changes and extends certain tax credits. It would extend the ARPA-expanded Child Tax Credit for three years, make it fully refundable on a permanent basis, and create a monthly payment option for those who qualify. It would also permanently expand the Earned Income Tax Credit for workers without qualifying children. Those two provisions cost about $600 billion in the budget.

RON WINGRIGHT: The budget also expands the Low-Income Housing Tax Credit (LIHTC) and creates a tax credit for rehabilitating homes in high-poverty neighborhoods.

BRIAN DILL: On the real estate side, in addition to the 1031 and carried interest proposals, there's troubling depreciation recapture language. We also saw the New Markets Tax Credit (NMTC) resurface in the proposal, and stakeholders have advocated for making NMTC permanent.

HOST: Sarah, what other problematic proposals did you see?

SARAH MCGREGOR: One proposal would make all S corporation income subject to either self-employment tax or the Net Investment Income Tax for taxpayers above certain earnings levels, such as above $400,000, meaning passive S corporation earnings could be subject to the NIIT.

SARAH MCGREGOR: The proposal would make the Section 461(l) excess business loss limitation permanent. Currently, the Inflation Reduction Act extended it through the end of 2028, but this would make it permanent.

SARAH MCGREGOR: A related change would treat disallowed business losses under Section 461(l) not as net operating losses but as business losses that carry forward only to offset future business income. That would be a significant change.

SARAH MCGREGOR: The budget also updates digital asset rules, including expanding wash sale loss rules to cover digital assets, which would limit taxpayers' ability to sell and immediately repurchase digital assets to claim losses.

SARAH MCGREGOR: On energy, the budget increases energy taxes, including repeal of expensing for intangible drilling costs and percentage depletion for oil and gas wells. It also adds a new 30% tax on electricity used for digital asset mining, signaling policy priorities toward clean energy.

HOST: Brian, any potential good news on international compliance for individuals?

BRIAN DILL: Yes. For individuals with Passive Foreign Investment Company (PFIC) issues, the proposal would allow a retroactive Qualified Electing Fund (QEF) election in certain situations. Many unsophisticated investors miss the QEF election and face punitive tax rates and interest-like charges as a result. Allowing a retroactive QEF election could alleviate that burden, although taxpayers may need to keep the statute of limitations open for the years involved.

BRIAN DILL: There's also a push to include digital assets on FATCA reporting requirements. The Treasury continues to consider FATCA and FBAR approaches for digital assets. The proposal also contemplates simplifying the foreign tax credit rules for individuals.

HOST: Where are we on Section 174—the capitalization and amortization of research and experimental expenditures?

RON WINGRIGHT: There's significant bipartisan pressure to repeal the Section 174 capitalization requirement that took effect January 1, 2022, under the Tax Cuts and Jobs Act (TCJA). Historically, taxpayers could deduct research and experimentation expenses, but the 2017 change requires capitalization and amortization over five years (domestic) or 15 years (foreign).

RON WINGRIGHT: There is broad support in Congress to repeal that change retroactively to January 1, 2022. Senator Hasson introduced a repeal bill in the Senate, and the House is scheduled to introduce similar legislation. The expectation is a possible repeal in the third quarter of 2023, though timing is uncertain relative to filing and payment dates.

BRIAN DILL: The R&D repeal aligns with the administration's broader policy to encourage onshoring jobs and manufacturing. The budget includes incentives like a 10% credit for onshoring jobs while limiting export subsidies, consistent with other international provisions.

HOST: Let's move to final comments. Ron?

RON WINGRIGHT: The president's budget expands and creates significant tax increases that could place the United States at a competitive disadvantage globally. Requiring capitalization and amortization under Section 174 while other countries expand R&D incentives is a concern. Overall, this budget is a positioning document ahead of upcoming debt ceiling and budget negotiations.

HOST: Brian?

BRIAN DILL: The international anti-deferral rules in the proposal—GILTI changes, limitations on foreign tax credits, and UTPR—are the opening salvo, and I expect negotiations to move toward a rate closer to OECD Pillar Two's 15% minimum. We're also seeing Treasury identify loophole closures in international transactions, and taxpayers should watch for those.

HOST: Sarah?

SARAH MCGREGOR: Many of these revenue raisers will be useful pay-fors in future legislation. The proposals signal a clear political message to target wealthy individuals and large corporations. Whether the provisions pass now or later, expect many of these ideas to resurface.

HOST: That's a wrap on our discussion of President Biden's proposed budget and related tax changes. A quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, for your specific tax issues or to discuss information from today's podcast. Check out the firm's website at cb.com for the latest guidance and materials on this and other tax and business topics.

HOST: This concludes today's podcast. Please like, share, and subscribe.

HOST: Thank you, Ron, Brian, Sarah, and our listeners for spending your time with us.